Competitive bidding networks

To network or not to network? That is the question for home medical equipment companies.

The competitive bidding guidance that CMS first issued in August 2006 finally offered specific rules for taking part effectively in the competitive bidding process. These standards clearly open the door for home care companies to participate in competitive bidding by collaboration through the mechanism of a contracting network.

How can companies forge effective network collaborations for competitive bidding? What financial, operational and legal guidelines should home care businesses follow? Let’s explore the nuts and bolts, as well as the bows and ribbons, of competitive bidding networks.

In a survey HomeCare magazine conducted last fall, 60 percent of the providers responding indicated that they planned to participate in competitive bidding. And 61 percent of those indicated an intent to bid individually.

But almost a third (32.1 percent) of those who plan to bid said they are considering the network model. “Being small,” wrote one provider, “[a network] is our only option.”

In its comments on the proposed competitive bidding rules, CMS stated: “We propose allowing suppliers the option to form networks for bidding purposes. Networks are several companies joining together via some type of legal contractual relationship to submit bids for a product category under competitive bidding. This option will allow suppliers to band together to lower bidding costs, expand service options, or attain more favorable purchasing terms.”

CMS elaborated by offering these additional details:

• Formal Legal Entity A competitive bidding network must be a formal legal entity. Home care companies may not simply collaborate informally, nor may they team up in an unstructured mechanism such as a general partnership. CMS suggested that the entity be “a joint venture, limited partnership, or contractor/subcontractor relationship which would act as the applicant and submit the bid.” To some extent, a network’s legal structure will be driven by its operational model. Any network proposing a bid must be fully and formally in place prior to the bid submission. This requires all relevant legal documents to be in place among the network members. Typically, these would include structural and operational rules for the network (articles of formation, operating agreements, owner agreements, etc.), as well as contractual documents (participation agreements, management services agreement, etc.) between the members and the network entity concerning various duties and obligations.
• Eligibility Each member of the network “must be independently eligible to bid.” If a member becomes ineligible, the network will have 10 days after notification to expel that member and resubmit its application. This requirement strongly implies that the network must be able to monitor, or at least confirm, each member’s continued entitlement to participate in the Medicare contracting process, and must be able to act quickly and decisively if a problem arises. The capacity for assuring ongoing accountability will be a key component of a compliant and successful network.
• Accreditation and Quality Control Similarly, the rules require each network member to be able to meet any accreditation and quality standards that are required. CMS states that each network member “is equally responsible for the quality of care, service and items that [the network] delivers to Medicare beneficiaries. If any member of the networks falls out of compliance with this requirement, [CMS] would have the option of terminating the network contract.” This is a troubling provision. Is CMS merely saying that any member’s quality problems will allow the agency to reassess the entire network’s worthiness? Or is CMS also saying the network members collectively may be accountable and financially responsible for problems caused by any one member? The answer to this question will undoubtedly affect the attractiveness of the network option to a significant degree. For example, if one of the network members was alleged to have committed fraud or to owe a substantial repayment, could that liability be imposed onto the entire network? CMS could certainly argue that a competitive bidding network should, in some ways, be viewed no differently than an HME company with multiple branches. If reimbursement or quality concerns arise at one branch, is it not appropriate to hold the company accountable? Regardless of how CMS resolves this question, it is clear that one of the functions of a safe and successful network will be to hold each member accountable for compliance and reimbursement activities. Indemnification should perhaps be part of the package. Networks may additionally decide to require evidence of effective compliance programs, or to impose a network-specific compliance program among the members. At a minimum, some network-wide standards of conduct, to which each member subscribes, would seem prudent.
• Product Categories; One Network As proposed, the rules permit a home care company to join a network for a single product category or for multiple product categories. Small companies that focus just on mobility products, for example, would not be disadvantaged because they do not offer the full range of equipment. However, the rules also limit a company from joining more than one network. Further, if a company joins a network, it “cannot submit individual bids,” a provision that also raises questions. Is this limitation specific to each product category? Could a home care company join a network for the provision of wheelchairs, but bid individually for a different product category? Could a single company join more than one network if tied to different product categories? While the proposed rules are unclear, the fair and logical answer would be to limit the “one network” rule to a specific product category. The “one network” rule also creates confusion for regional or national companies in multiple markets. Can a company utilize different networks in different markets? We shall see.
• Reimbursement Activities The rules require the network to be responsible for billing Medicare and receiving payment on behalf of its members. The network would further have the responsibility for distributing reimbursement to its members appropriately. This, of course, imposes a necessity for the network to be capable of billing accurately and effectively, and to be accountable for the appropriate distribution of funds.
• Competition Finally, CMS stated, “the network cannot be anti-competitive.” CMS proposed a rough formula to gauge whether a network is so large that it unduly influences competition in the marketplace. Specifically, the agency said “that the network members’ market shares for competitive bid item(s) when added together cannot exceed 20 percent of the Medicare market within a competitive bidding area.”

CMS’ reasoning is that the 20 percent threshold allows a network to be large enough to “gain the potential efficiencies of networking while at the same time ensures enough competitors remaining in the marketplace to ensure competition.” CMS has solicited comments about the appropriateness of this 20 percent threshold.

The feds have worried about anti-competitive activities by networks for at least 15 years. One concern, as implied by CMS in its commentary and proposed network rule, is that the network members not create a conglomerate so big as to dominate the market.

As a practical matter, this means that a network must gauge the proposed capacity of its members for participation on the basis of their Medicare revenues. These will be based largely on historic information, at least initially, and the aggregate market information will be available from CMS or Palmetto GBA, the Competitive Bidding Implementation Contractor.

There is another form of anti-competitive behavior, however, called “price-fixing.” In most cases, price-fixing is an automatic violation of federal antitrust law. It is defined as an agreement among companies that has the purpose or effect of raising, depressing or fixing prices.

Market share and market power are irrelevant factors in price-fixing cases. If you fix prices, you break the law. There is every reason to expect at this point that price-fixing rules will apply to competitive bidding networks, despite CMS’ current focus only on the “20 percent” rule.

Therefore, a competitive bidding network must comply with the price-fixing safeguards imposed on networks generally to control the flow of pricing and cost information among its members. Typically, this will require that the network gather members’ pricing and cost information in a confidential manner designed to ensure that the members do not learn of each other’s price or cost information.

The network itself must act as a sort of information gatekeeper. If the network is run by its members, it will need to have an independent third party gather this information, analyze and coordinate it for purposes of assembling an appropriate bid.

Costs and Services

A network’s obligations will cost money to perform. It must monitor quality, competitiveness and compliance. It must gather, manipulate and disseminate financial information. It must bill accurately and disseminate reimbursement appropriately.

These tasks all impose administrative costs, typically in the range of 5 to 15 percent of revenues. Thus, HME companies must expect that the network’s competitive bid proposal will be increased to reflect an appropriate administrative component. In order for the bid to remain competitive, network members may well need to pare profit expectations to a minimum level.

Some home care companies may craft networks that extend beyond Medicare bidding. Many networks have achieved gains with managed care plans and third-party payers. Such expansion can help reduce the network costs and allow a lower competitive bid because expenses may be applied beyond the network’s competitive bidding role.

Networks that extend into the private sector will need to pay careful attention to their structure and operation. If the network members do not wish to integrate their operations substantially, to create significant quality controls or to impose financial risks, then the federal antitrust law will limit their network to the role of “information conduit.” This is called the “messenger model,” and utilizes the network to facilitate transmission of pricing and contract proposals between third-party payers and the individual network participants.

This role can become cumbersome and legally unwise unless it is handled carefully, and unless it emphasizes to the third-party payers the administrative convenience and effectiveness of dealing with the network rather than negotiating with the member companies individually.

Another direction for potential network expansion is with value-added services. As examples, a network may offer any or all of the following additional services:

• Inventory control: economies of scale; consultant expertise; tracking software.
• Managerial oversight: internal communications; data tracking; marketing supervision; contract negotiations.
• Administrative services: human resources and recruitment; facility services; education/consultant expertise.
• Compliance oversight: accreditation; regulatory compliance; quality control standards; antitrust; consultant expertise.

Also, a network may offer some of these services to non-network members. Of course, all of these services are attractive options only when a network’s members desire them and are willing to pay for them.

Success or Failure?

I have created dozens of health care contracting networks over the years, and I have observed the life cycle of hundreds more. Many networks fail. Most of these failures occur because networks pay insufficient attention to adding value for their participants.

For CMS and other potential contractors, added value comes from the network’s ability to demonstrate that its members will offer high quality, timely services at a reasonable price; that it can communicate effectively and professionally; and that it can ensure that its members deliver on its promises.

For HME companies, this added value requires the network to utilize its leverage to provide Medicare contracting opportunities with an acceptable profit margin, notwithstanding the network’s own costs; and, to help its members deliver and monitor quality and legally compliant behavior. Both of these enhancements will benefit network members far beyond competitive bidding.

Any network that says “it will be business as usual; you won’t feel a thing,” is probably laying the groundwork for failure. In the right circumstance, for the right participants, a network can be a terrific enhancement and opportunity. Knowledge and attention to detail will be keys to success.

Note: At press time, CMS’ final rule on national competitive bidding had not been issued. For updates, contact Neil Caesar at [email protected].

Neil Caesar is president of the Health Law Center (Neil B. Caesar Law Associates, PA), a national health law practice in Greenville, S.C. He also is a principal with Caesar Cohen Ltd., which offers compliance training, outsourcing and consulting and the author of the Home Care Compliance Answer Book. He can be reached by e-mail at [email protected] or by telephone at 864/676-9075.